Guide to Group Rating and Benefits 2009 - Group Benefits

Small to medium-sized businesses are the backbone of the local and national economy. More than 5,000 of the 6,000 members of the Cincinnati USA Regional Chamber have fewer than 50 employees.

While the majority of employers offer them, employee benefits can be a double-edged sword for small and medium-sized business owners. They’re the offerings that can attract and keep the workers who help an enterprise grow, but they can also be the administrative and budget pain that keeps owners awake at night with visions of acronyms dancing in their heads: 401k, PEO, FICA, MCO, SEP, TPA, ERISA, FMLA, COBRA ...

There was a time when the owner of a small business would just call the family agent to find a health insurance plan, or seek one through a chamber of commerce or other association that offers member group rates. In some instances, that approach still works. But today, the world of employee insurance and other benefits is as complicated as the global economy. The typical owner-operator doesn’t have the time or expertise to manage it all, nor does he or she have a large enough budget to hire a full-time human resources or benefits manager.

One way to break down the complexity is to look at what employers must do, such as comply with local, state and federal laws, and what they have the option of doing, such as offer health and disability insurance, some kind of retirement plan or other fringe benefits.

In the required ledger are an employer’s contribution to Social Security and Medicare, and premiums for unemployment insurance and workers’ compensation, which provides compensation medical care for employees injured while on the job. In Ohio, workers’ compensation insurance and claims are regulated by the state and require employers to contract with a managed care organization, with insurance premiums paid to the Ohio Bureau of Workers’ Compensation. Employers have the option of contracting and paying Third Party Administrators directly to earn discounts through group ratings and to save on workers’ compensation claims.

Health insurance may not be a legal obligation, but most employers of all sizes try to subsidize at least basic coverage to compete for workers. Corporate pension plans are disappearing from the U.S. scene, but most workers seek employers that offer some form of qualified retirement plan, such as a 401(k).

Beyond that, there’s an ever-growing variety of fringe benefits companies can deduct as expenses, and which can often be set up as pre-tax options — excluded from the employee’s gross income and not subject to federal income tax. Vision and dental plans, life and long-term care insurance and disability coverage are among the most common benefits. Employers also can set up pre-tax plans to help employees care for dependents (children or elderly relatives), transit costs and parking expenses.

Add to this the fact that just about every employee administration task can be outsourced in today’s world, including payroll and human resources responsibilities ranging from background checks on job applicants to complicity with government regulations such as Occupational Safety and Health Administration workplace rules. A company classified as a PEO, or Professional Employer Organization, can provide such services, along with workers’ compensation and benefits administration.

A PEO is based on the concept of co-employment: It acts as the employer of record for matters such as tax filings and workers’ compensation insurance, which is what differentiates a PEO from an HRO, or Human Resources Outsourcing, company.

So, where’s a small business owner to begin?

HOW TO GET STARTED

Most experts agree that a best first step is consulting with an attorney. Within some firms, a general business lawyer can call in associates who are experts in taxes, employment law and other relevant areas. This counsel can help clarify your obligations, protect you from costly legal pitfalls, and chart your course on seeking proposals from benefits providers.

“Typically, a business owner will seek legal counsel on mandated benefits,” says Brian P. Gillan, a business attorney specializing in employment relations at Wood & Lamping LLP. “In my experience, when looking beyond the required benefits, the business owner will go back to that same source on the other benefits.”

However, legal advice is essential for more complicated plans. Gillan notes that complying with the Employee Retirement Income Security Act of 1974, a federal law that sets minimum standards for most voluntarily established pension and health plans, requires various notices to employees and plan documents that have to be filed with federal authorities for legal review.

As for creative benefits that require legal guidance, one example Gillan cites are phantom stock plans — an option for employee ownership in privately held companies that cannot offer the kind of ESOPs, or Employee Stock Ownership Plans, common among publicly traded companies.

In general, smaller business owners “are typically bombarded by vendors” offering all kinds of employee benefit packages and services, Gillan observes. They often turn to the frontline professionals they trust, such as their lawyer, accountant and banker, “to filter through those offers.”

Gillan says trade organizations, such as the Employers Resource Association (www.hrxperts.org) and the Greater Cincinnati Human Resources Association (www.gchra.org), can also be helpful in sorting through the options.

Note that banks also offer a variety of integrated services that can help small businesses take the next steps with employee benefits. Insurance agencies, too, can offer services in this area. The question is: How can employers know if an employee benefits consultant is experienced and trustworthy?

“I believe the first thing any new organization would want to do is to find a highly competent adviser for group benefits or investments,” says Joe Weldon, president and managing partner of the W Group, a company that advises businesses on how to improve their health benefits plans.

Weldon adds that new businesses need to be made aware of what other competing organizations are doing with benefits. Benchmarking data is also important so that a company trying to compete does not over-provide or under-provide benefits. The exception to this would be a company that wants to emphasize benefits as a recruitment incentive. That company would over-provide benefits to establish a competitive advantage in the hiring process.

One popular trend is to offer flexible spending or cafeteria accounts for workers, also known as consumer-driven benefits. The employer, working with service providers, offers a menu of optional benefits. “Consumer-driven just means a plan design that’s going to encourage thoughtful consumption of healthcare,” Weldon explains. That can be a high deductible plan, higher out of pocket, or more commonly, a Health Savings Account, or HSA.

In an HSA, employees set aside money to cover out-of-pocket, eligible healthcare expenses such as prescription and doctor visit co-pays, over-the-counter medications, contact lenses and solution, dental and orthodontic expenses.

“A typical HSA account being offered would be a $2,000 deductible for an individual, and $4,000 for a family,” Weldon says. The amount that company contributes can range from zero to 100 percent. “They’re almost always offered as a dual option, so it’s not forced upon the employee. They don’t feel like they’re being sold a bill of goods. They’ll generally offer two accounts and then let the employees pick.”

Weldon says an experienced adviser or agent can walk a company through the options. “The math doesn’t always work,” Weldon notes, “but essentially ... you offer two different plans, do the math and provide some claim examples to the employees to (determine) if they are a low user, moderate user, or high user of health care. You show how each plan would work for them, and how it will hit their pocketbook.”

RETIREMENT OPTIONS

As for retirement plans, there’s much more than 401(k) options to consider, such as a Simplified Employee Pension (SEP). The employer can contribute up to 25 percent of an employee’s compensation or $40,000 (whichever is less) to a qualified IRA account. SEPs require little paperwork and are much less costly to administer than a 401(k).

Another choice for companies taking that first step with a retirement benefit is a Simple IRA (which stands for “Savings Incentive Match Plan”), which is available to companies with up to 100 employees. Both the employer and employee make contributions to individual IRA accounts. The employer can either match the employee contributions, or contribute a fixed percentage of all eligible employees’ pay.

Another flexible benefit option gaining popularity are “cross-tested” approaches, such as the “new comparability” type of plan. This allows the employer to offer different tiers of profit sharing or retirement benefits, such as one that takes into account an employee’s age, length of service and compensation. For example, in a small company, a comparability plan, properly structured under IRS guidelines, could offer higher 401(k) contributions to the older owner/operators or senior managers, compared to the company’s contributions for the youngest workers with the shortest length of service.

More and more small and medium businesses are realizing that offering some kind of retirement benefit is no longer optional in competitive markets, notes Angie Wright, a vice president with the Sheakley Group of Companies in Cincinnati. “If you don’t offer those benefits, someone else will — and you could end up losing your best people.”